Trafalgar Capital Associates, Inc. v. Cuomo

• Citation: 159 F.3d 21
• Decision Date: 16 September 1998
• Docket Number: 97-2153,Nos. 97-2152,s. 97-2152
• Parties: TRAFALGAR CAPITAL ASSOCIATES, INC., Etc., Plaintiff, Appellee, v. Andrew CUOMO, Etc., Defendant, Appellant, Executive Office of Communities and Development, et al., Defendants, Appellees. TRAFALGAR CAPITAL ASSOCIATES, INC., Etc., Plaintiff, Appellant, v. Andrew CUOMO, Etc., et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 21

159 F.3d 21

TRAFALGAR CAPITAL ASSOCIATES, INC., Etc., Plaintiff, Appellee, v. Andrew CUOMO, Etc., Defendant, Appellant,

Executive Office of Communities and Development, et al.,

Defendants, Appellees.

TRAFALGAR CAPITAL ASSOCIATES, INC., Etc., Plaintiff, Appellant, v. Andrew CUOMO, Etc., et al., Defendants, Appellees.

Nos. 97-2152, 97-2153.

United States Court of Appeals, First Circuit.

Heard Sept. 16, 1998.

Decided Oct. 29, 1998.

Rehearing and Suggestion for Rehearing En Banc Denied Dec. 30, 1998.

Maria Simon, Attorney, Appellate Staff, with whom Frank W. Hunger, Assistant Attorney General, Donald K. Stern, United States Attorney, and John F. Daly, Attorney, Appellate Staff, were on brief for Andrew Cuomo, Etc.

Carl A.S. Coan, Jr., with whom Carl A.S. Coan III, was on brief for Trafalgar Capital Associates, Inc.

Before SELYA, Circuit Judge, ALDRICH and COFFIN, Senior Circuit Judges.

COFFIN, Senior Circuit Judge.

The United States Department of Housing and Urban Development ("HUD") agreed to subsidize a portion of tenants' rents in a housing rehabilitation project owned by the Heywood-Wakefield Associates Limited Partnership ("Heywood-Wakefield"). Appellee/cross-appellant Trafalgar Capital Associates, Inc. ("Trafalgar"), the general partner of Heywood-Wakefield, ¹ complained that HUD miscalculated the amounts to which the project was entitled. Upon cross-motions for summary judgment, the district court found that three decisions by HUD were arbitrary and capricious and that Trafalgar's claim on a fourth HUD decision was barred by the statute of limitations. We hold that the district court erred on two of the claims, but correctly ruled for HUD on the third and on the statute of limitations. We accordingly affirm in part, and reverse in part.

I. Background

A. Statutory Scheme

HUD agreed to subsidize Trafalgar's project under the Moderate Rehabilitation Program, 42 U.S.C. § 1437f(e)(2), one of the programs under Section 8 of the United States Housing Act of 1937, 42 U.S.C. § 1437f ("Section 8"). ² The Moderate Rehabilitation Program is designed to encourage private individuals to rehabilitate low and moderate income housing through the award of rent subsidies. Under the program, HUD contracts with local public housing agencies, which in turn contract with the project owners who rehabilitate the property. Regulations require the local public housing agency to secure a preliminary contract with the project owner prior to rehabilitation, and a permanent agreement once the rehabilitation is completed and the units are ready for occupancy.

Both the preliminary agreement, known as the "AHAP," or Agreement to Enter into a Housing Assistance Payments contract, and the permanent agreement, known as the "HAP," or Housing Assistance Payments contract, set a "contract rent" based on the applicable regulations. See 24 C.F.R. § 882.408 (1998). Residents eligible for Section 8 housing are required to pay rent based on their monthly income. See 42 U.S.C. § 1437a(a). HUD pays the owner the difference between the "contract rent" and the amount the resident pays. See 42 U.S.C. § 1437f(c)(3)(A).

The contract rent is based on two components: 1) the "monthly rehabilitation debt service," which covers the cost of rehabilitation; and 2) the "base rent," reflecting the cost of owning, managing, and maintaining the property independent of rehabilitation costs. See 24 C.F.R. § 882.408(c)(2) (1998). The base rent is also allowed to incorporate a reasonable return on investment. HUD Handbook 7420.3 ("HUD Handbook"), p. 2. Both the base rent component and the contract rent total are subject to market-based ceilings, and are adjusted annually. ³ See 42 U.S.C. § 1437f(c); 24 C.F.R. § 882.410(a)(1) (1998). The base rent is ordinarily capped at the Existing Housing Fair Market Rent ("FMR"), and the contract rent has a ceiling of 120 percent of the relevant FMR. See 42 U.S.C. § 1437f(c); 24 C.F.R. § 882.408(a) (1998). FMRs, published annually by HUD, are based on an analysis of the rents charged for similar standard units in the same general geographic region. See 42 U.S.C. § 1437f(c).

In certain situations HUD can approve increases for costs not sufficiently taken into account in the contract rent calculation. An "exception rent" may be granted if the FMR does not accurately reflect the actual rents charged in the project's "specified area," meaning its more narrowly defined geographic region. See 24 C.F.R. § 882.408(b) (1998), HUD Handbook, Ch. 10, 10-2(c)(1). If HUD approves such an exception rent, the owner may charge an additional 10 percent over the usual contract rent ceiling. See 24 C.F.R. § 882.408(b) (1998).

B. Facts

In February 1984, Trafalgar filed its proposal with HUD to convert an abandoned furniture factory in Gardner, Massachusetts into moderate income housing. The preliminary AHAP for the project was executed on April 30, 1986, with a retroactive effective date of February 8, 1986. The rehabilitation proceeded in four stages. After the fourth stage was completed, the final portion of the permanent HAP was executed on April 17, 1990.

Trafalgar also has a contract in connection with the same project to receive more than $1.1 million in assistance over 15 years from a state program known as the Massachusetts State Housing Assistance for Rental Production ("SHARP") program.

Trafalgar believed that HUD made several incorrect decisions that had the effect of reducing the subsidies to which Trafalgar was entitled. After lengthy correspondence and proposals to revise the HAP, Trafalgar brought this action under the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 551-59, 701-6, and the Declaratory Judgment Act, 28 U.S.C. § 2201. Trafalgar's complaint charged four errors: (1) HUD erroneously excluded costs incurred before the AHAP; (2) HUD improperly refused to raise the contract rent after offsetting errors were discovered; (3) HUD mistakenly characterized the Massachusetts SHARP assistance as a grant rather than a loan; and (4) HUD incorrectly used the 1985 FMR instead of the 1986 FMR. Upon cross-motions for summary judgment, the district court ruled that HUD's decisions on the first three issues were arbitrary and capricious, but that Trafalgar's claim on the fourth was barred by the statute of limitations. Both parties appealed.

Additional facts will be developed in subsequent sections as they become relevant.

II. Discussion

This court reviews the district court's grant of summary judgment de novo, viewing the facts in the light most favorable to the non-moving party. See FDIC v. Kane, 148 F.3d 36, 38 (1st Cir.1998). We can affirm only if "the record discloses no trialworthy issue of material fact and the moving party is entitled to judgment as a matter of law." EEOC v. Green, 76 F.3d 19, 23 (1st Cir.1996).

With respect to the three HUD decisions, they can only be set aside if they are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). When exposed to judicial review, HUD's decisions are entitled to "great deference" and are presumed valid. Associated Fisheries of Maine, Inc. v. Daley, 127 F.3d 104, 109 (1st Cir.1997). The court must affirm HUD's decisions if they are "reasoned, and supported by substantial evidence in the record." Id. "Although searching and careful, review under the 'arbitrary and capricious' standard is narrow in scope." Pan American Grain Mfg. Co. v. E.P.A., 95 F.3d 101, 103 (1st Cir.1996). The court may not substitute its judgment for that of the agency, and agency decisions will be upheld so long as they "do not collide directly with substantive statutory commands and so long as procedural corners are squarely turned." Adams v. E.P.A., 38 F.3d 43, 49 (1st Cir.1994). The court's deference to HUD's decisions "is magnified when the agency interprets its own regulations." Puerto Rico Aqueduct & Sewer Auth. v. E.P.A., 35 F.3d 600, 604 (1st Cir.1994). While this standard of review is highly deferential, "it is not a rubber stamp." Citizens Awareness Network, Inc. v. U.S. Nuclear Regulatory Comm'n, 59 F.3d 284, 290 (1st Cir.1995). To avoid being found arbitrary and capricious, HUD's decision must be rational; that is it "must make sense to [the] reviewing court[ ]." Puerto Rico Sun Oil Co. v. E.P.A., 8 F.3d 73, 77 (1st Cir.1993).

Whether the statute of limitations barred Trafalgar's claim regarding the relevant FMR is an issue of law, and that aspect of the district court's decision will be reviewed de novo. See American Airlines, Inc. v. Cardoza-Rodriguez, 133 F.3d 111, 125 (1st Cir.1998).

A. Whether HUD improperly excluded costs incurred before February 8, 1985 from the rent calculation.

Although HUD regulations require that the parties execute an AHAP before the owner begins rehabilitation, see 24 C.F.R. § 882.505 (1998), Trafalgar started work before executing such an agreement. When the public housing agency overseeing rehabilitation learned of Trafalgar's failure to enter into the AHAP, it ordered rehabilitation halted, and a meeting was called on February 5, 1986. At that meeting the parties agreed to execute an AHAP, which they finally did on April 30, 1986. Because it was clear that the AHAP would be executed, and the parties wanted rehabilitation to continue, they agreed at the meeting to backdate the AHAP to February 8, 1986, three days hence.

Between the date the proposal was submitted and February 8, 1986, Trafalgar had spent about $1.6 million on rehabilitation. At the February 5 meeting the parties discussed how these funds might be incorporated into the amounts Trafalgar could recover from HUD, but they evidently did not settle the specific method for doing so. ⁴ HUD, however, later determined that regulations barred including the $1.6 million in the subsidy calculations. The district court ruled that HUD's apparent reversal was arbitrary and capricious. Our review persuades us to the contrary.

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